Gang of Six Plan Reduces Deficit by $3.7 Trillion

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While budget plans are being hammered out in Washington, the old saying “the devil is in the details” has been truer. Voters concerned about what is going on in Washington are asking themselves one simple question: will my taxes go up or down when a budget agreement is reached?

As with most political issues, it is not an easy question to answer and both supporters and detractors of the plan can lay claim to providing a correct answer.

The “Gang of Six” plan has garnered the most attention in recent days but is short on details of exactly how much the plan would cost or save.

Here’s what the Gang of Six Plan claims to do.

The plan reduces the deficit by about $3.7 trillion by rewriting the tax code, freezing domestic spending, and rearranges some entitlement programs. Its goal is to stabilize the nation’s publicly held debt by 2014.

It also aims to reduce our publicly-held debt to about 70 percent of our economy by 2021. But for the person on the street, that’s still a long way off.

The plan would be implemented in two phases.

The first bill would make immediate cuts and the second piece of legislation would seek to enact comprehensive reform, but gives committee chairmen and legislative leaders lots of leeway in making rules and rewriting the tax code. As it stands now, Democrats will retain control over rewriting the tax code unless the majority shifts after the 2012 election cycle. Republicans will most likely retain control of the House for the foreseeable future.

There is a third part that calls for consideration of Social Security reform that if successfully passed, would be combined with the second phase.

The plan seeks to reduce the marginal income tax rate to between 23 percent and 29 percent and abolish the $1.7 trillion Alternative Minimum Tax (AMT), which is confusing even to most economists, but suffice it to say, it takes more out of the middle income taxpayers pocket than it should. The top individual tax rate is currently 35 percent.

What budget hawks are searching for is how the reforms will lower taxes and how large the cuts could be and what it would look like in the end.

Some analyst are saying the plan appears to be a $2 trillion to $3 trillion tax increase while Senator Ken Conrad (D-N.D.) says it is a $1 trillion tax cut.

The simple answer to that question is it depends on what assumptions you make about the future tax code.

The Gang of Six is relying on what it calls a “plausible baseline” of future tax rates. However, the plan doesn’t assume current tax politics will stay in place. The assumption it makes is that around 30 million middle-income taxpayers will pay the AMT tax and that the Bush tax credits are extended past 2013 for those making more than $250,000 annually.

The formula used to reach the $1 trillion tax cut is calculated by assuming taxes will increase by $3.8 trillion over a 10-year period. With the Gang of Six plan reducing that to $2.8 trillion, they can claim the $1 trillion as savings.

The part that may make the average middle-income taxpayer nervous is certain popular exemptions such as mortgage and charitable deductions and healthcare and retirement deductions would not be eliminated, but “reformed.” No one yet knows what “reformed” will look like. An editorial in this morning’s Wall Street Journal offers its advice to tax writers, suggesting personal tax rates be reduced to the 1986 levels of 15 percent and 28 percent.

Conrad is saying the plan has the backing of 40 senators from both parties.

What is the bottom line? Will taxes do up or down?

“The bottom is relative to what may happen, they would reduce taxes if nothing happens,” Roberton Williams, senior fellow at the Tax Policy Center told The Christian Post. “But Congress has to do something at some point. Someone will have to pay more, it’s just a matter of who pays what and how much.”

As far as other plans go, there are still a number floating around Capitol Hill but none have gathered the attention the Gang of Six plan has at this point.

House Minority Leader Nancy Pelosi (D-Calif.) said in a briefing Thursday, “We have many [options]. We have Simpson/Bowles, we have Domenici/Rivlin, we have the Center for American Progress, we have the Center on Budget and Policy Priorities.”

While these and other plans exist, it’s doubtful any of the plans Rep. Pelosi mentioned will muster enough support to pass in a Republican controlled House.

“No one knows what’s going to happen,” said Williams. “There are a lot of bumps in the road between here and there. One thing’s for sure, we’re not going to get anywhere until someone compromises.”